FDA Scrutiny Clouds Cigar Outlook

While flavored and pre-priced cigar sales are booming, FDA’s pending regulation of the category could upset trends and profits.

by Erin Rigik, Associate Editor.

Tedeschi Food Shops does a strong cigar business, and with 3-4 feet of space reserved for cigars on the back bar, consumers take notice.

Sales on cigars were up for the chain in the first half of 2011. For the second half of the year, Tedeschi’s Director of Purchasing, Stephen Monaco said that unit volumes continued to experience double digit increases, but dollar volumes dipped a bit as a direct result of manufacturers flooding the market with pre-priced single cigars at 69 cents and 99 cents.

In 2012, Monaco expects unit volume at his stores will continue at double-digit increases, and is hopeful dollar sales will follow suit. “I expect the increase in pre-priced product and reduced retail product will be less in 2012, so it is my hope we’ll still see some significant gains in the category,” he said.

Teceschi’s, which operates 190 c-stores in Massachusetts, New Hampshire, Rhode Island and Connecticut, has seen a shift in consumer demand to pre-priced single cigars and away from the four and five pack cigars. As a result, manufacturers have followed suit by offering more pre-priced cigarillos and single cigars.

“Right now our singles, and our two- and three-pack cigars represent about 81% of the whole cigar volume,” Monaco said. “People are looking for value in this economy and are more apt to buy individually than buying at a four- or five-pack price.”
Twenty-count packs of little cigars have also grown substantially. “I believe a lot of that has to do with the price points,” Monaco noted. “You can buy a 20-pack of little cigars for $1.69 or $1.79, when a pack of 20 cigarettes costs you $7-$9 dollars.”

But it’s just these kinds of deals that are causing lawmakers to take a closer look at tax discrepancies between tobacco products.

Cigar Restrictions
Town ordinances and federal bills alike are threatening to throw a big wrench in the cigar trends of 2012.

Some states and towns are trying to pass legislation to ban flavored single cigars or single cigars in general. As a result, Monaco expects to see manufacturers offer more multi-pack cigars in the latter half of 2012, such as buy-five-get-four, or buy-four-get-three packs.

Tom Briant, executive director of the National Association of Tobacco Outlets (NATO), said one of the biggest threats facing cigars is “a proliferation of local regulations in Massachusetts to prohibit the sale of single cigars, unless the retail price of a single cigar is more than $2.50, and to require cigars to be sold in packages of four or more.”

Additionally, several health boards in Massachusetts have been considering such cigar regulations. “NATO has been working successfully to oppose these restrictions,” Briant said.

The Boston Public Health Commission was the first health board to adopt such cigar restrictions, which went into effect on Feb. 1, 2012 in Boston. Since that time other Massachusetts health boards have considered following suit. “As NATO has argued to local health boards, the state legislature has not granted a health board the authority to regulate cigar package size nor minimum cigar prices,” Briant said.

OTP Concerns
Another cloud looming over the cigar industry is the yet to be released FDA proposed regulations on other tobacco products (OTP), which could include cigar regulations and increase local restrictions on cigar packaging sizes and cigar minimum pricing.

In April 2011, the FDA issued a public letter indicating it planned to draft and issue proposed regulations on OTP, including cigars, and indicated regulations considered for cigars could include product registration, product listing, ingredient listing, good manufacturing practice requirements, user fees and adulteration and misbranding provisions, Briant explained.

Some retailers worry the FDA rules could impact cigar flavors, as it eliminated cigarette flavors following the Tobacco Control Act.

Meanwhile, some legislators are alleging manufacturers and retailers are avoiding the ban on flavored cigarettes by marketing their products as flavored cigars, which are not prohibited by law.

Convenience store retailers have seen a strong business with flavored cigars since flavored cigarettes evaporated from the retail landscape. From chocolate to cherry to wine, cigar flavors are in demand and being helped along with aggressive pricing and
promotions from tobacco marketers.

U.S. Senators Dick Durbin (D-Ill.) and Frank R. Lautenberg (D-N.J.) announced on April 27 that the Senate Appropriations Committee, of which they are members, approved a report that urged the FDA to issue regulations asserting its regulatory authority over tobacco products—including cigars.

But retailers and manufacturers alike insist flavored cigars are marketed for adults and are nothing new. “Flavored cigars have been manufactured for decades, much longer than the federal tobacco regulatory law, which was enacted in June of 2009. Flavored cigars are not a new phenomenon, but have always been offered in response to demand for such a product by adult consumers,” Briant said.

Equalizing Taxes
Cigar tax rates are also under scrutiny. The federal Government Accounting Office (GAO) issued a report titled “Large Disparities in Rates for Smoking Products Trigger Significant Market Shifts to Avoid Higher Taxes” in April that showed the impact of the different federal tax rates on various tobacco products as a result of the federal cigarette and tobacco tax increases, which went into effect on April 1, 2009.

The report found large cigar sales, for example, rose from 411 million cigars to more than one billion cigars, while small cigar sales declined from about 430 million cigars to 60 million cigars, due to tax discrepancies. The report further noted that the federal government experienced revenue losses of between $615 million to $1.1 billion due to the market shifts from roll-your-own tobacco to pipe tobacco and from small cigars to large cigars.

The GAO report recommended that Congress should consider equalizing tax rates among tobacco products, including between small and large cigars.

In response to the GOA report, three U.S. Senators—Durbin, Lautenberg and Richard Blumenthal (D-Conn.) — introduced Bill Number S. 3801 to impose tax parity on all OTP products by setting the excise tax rate on all tobacco products at the same per unit level as cigarettes, which is $1.01 per pack.

Under current federal law, large cigars are taxed at a rate of 52.75% of the manufacturer’s price, with a maximum tax of 40.26 cents per large cigar. Little cigars that come in a package of 20 cigars are taxed at the cigarette tax rate.

“Senator Durbin’s bill would change the taxation of large cigars by adopting a new tax cap of not less than 5.033 cents per cigar and not more than 100.66 cents per cigar,” Briant said. “This means that with a higher tax cap amount, the federal cigar tax may increase on some cigar products based on the manufacturer’s price.”

At presstime, the bill had not yet been heard by a committee nor was there a similar bill in the U.S. House of Representatives.

Comments

MAkes no sense but then the taxing of everyone but politicians never has- not sure why the tax affected sales since the big cigars cost more then the small ones and dealers are also ripoping public off with the so say “cheap” outlets selling the 2for 1 or BOGO at more then the price of the one so actually while they get it for 2 for 1 price they make and extra $1-2 on each sale that no one can follow since their suppliers don’t see it’

The writing has been on the wall for a long, long time. Selling tobacco products is not a business that has a promosing future.For anyone who chooses to invest in a business whose products they sell are proven health hazards if used as directed, they should stop crying that governmental measures to protect the health of its consituents will put them out of business. They should realize that more and more tobacco control issues will be implemented going forward until the tobacco pandemic is over. The writing has been on the wall.Think about the eight-track tapes and eight-track tape players and the cassette tape. Anyone selling these products changed what they sold or saw they would go out of business. They could read the writing on the wall.For tobacco product sellers, start thinking about changing your business plan that shifts away from selling tobacco products or face the inevitable. The writing is clearly on the wall.

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